Two Crises, Different Outcomes: East Asia and Global Finance

By T. J. Pempel

Two Crises, Different Outcomes examines East Asian policy reactions to the two major crises of the last fifteen years: the global financial crisis of 2008–9 and the Asian financial crisis of 1997–98. The calamity of the late 1990s saw a massive meltdown concentrated in East Asia. In stark contrast, East Asia avoided the worst effects of the Lehman Brothers collapse, incurring relatively little damage when compared to the financial devastation unleashed on North America and Europe. Much had changed across the intervening decade, not least that China rather than Japan had become the locomotive of regional growth, and that the East Asian economies had taken numerous steps to buffer their financial structures and regulatory regimes. This time Asia avoided disaster; it bounced back quickly after the initial hit and has been growing in a resilient fashion ever since.

The authors of this book explain how the earlier financial crisis affected Asian economies, why government reactions differed so widely during that crisis, and how Asian economies weathered the Great Recession. Drawing on a mixture of single-country expertise and comparative analysis, they conclude by assessing the long-term prospects that Asian countries will continue their recent success.

• Language: English
• Publisher: Cornell University Press
• Release date: May 6, 2015
• ISBN: 9780801455018

Book preview

Two Crises,

Different Outcomes

East Asia and Global Finance

Edited by T. J. Pempel and

Keiichi Tsunekawa

Cornell University Press

Ithaca and London

Contents

List of Illustrations

Preface

Contributors

Introduction

1. Two Crises, Two Outcomes

PART 1. Dealing with Crises

2. A Tale of the Two Crises

3. Unraveling the Enigma of East Asian Economic Resiliency

4. Reacting to Financial Crises

5. China and the Two Crises

PART 2. Toward a Second East Asia Miracle?

6. Political Business and External Vulnerability in Southeast Asia

7. Success as Trap?

8. Japan

Conclusion

Works Cited

Index

Illustrations

Figures

2.1. Economic growth, 1997–98 versus 2008–9

2.2. Exchange rate, 1997–98 versus 2008–9

2.3. Inflation, 1997–98 versus 2008–9

2.4. Quarterly growth of export values

3.1. GDP growth rate of Taiwan and Korea, 1995–2013

4.1. Bank loans in Korea and Thailand, 1998–2012

4.2. Loan/deposit ratio of commercial banks in Korea and Thailand

5.1. Credit growth and CPI inflation

5.2. Physical infrastructure investment

5.3. Exports, imports, and official reserves

6.1. GDP growth rate of four Southeast Asian countries, 1990–98

6.2. Private sector credit

6.3. GDP growth rate of four Southeast Asian countries, 2002–10

6.4. Nominal USD exchange rates, 1996–99 and 2007–10

6.5. FDI and portfolio investment, 2005–11

6.6. Reserves/total external debt, 1991–2011

6.7. PRS political risk ratings, three-year rolling averages, 1991–2010

8.1. Share of expenditures in GDP

8.2. Japan’s GDP growth rate and its components

8.3. Contribution of three components of gross capital formation to GDP growth

8.4. Korea’s GDP growth rate and its components

Tables

I.1. GDP growth rate, 1990–2013

2.1. Policy responses in 1997–98 and 2008–9

3.1. Taiwan’s top fifteen banks by net worth

4.1. External debt of Korea, 2006–8

4.2. External debt of Thailand, 2006–8

6.1. Ratio of net inflow of debts to GDP, 1991–96

6.2. Ratio of net inflow of investment to GDP, 1991–96

6.3. Political-business relations in Southeast Asia, 1990s and 2000s

6.4. Policies, investors, and external vulnerability

8.1. Public expenditure and national debt

Preface

The East Asian countries surprised the world by an astonishingly quick recovery from the devastating economic crisis that hit the region in 1997–98. They repeated a similarly rapid rebound from the Global Financial Crisis of 2008–9 and have continued to increase their share of world production in the years since. Such achievements raise questions about the sources of such resilience and strength as well as about the long-term economic prospects of the region. To explore these questions, the Japan International Cooperation Agency Research Institute (JICA-RI) in 2010 launched a research project on the political economy of the East Asian countries. Keiichi Tsunekawa served as director of the institute at the time. JICA, the most important agency for official development assistance of Japan, wanted to learn lessons from the project that it could utilize in its future cooperation projects with the middle-income countries in East Asia and in its development operations in lower-income countries in Asia, Africa, and Latin America.

During the course of the project, we held two conferences at the institute, the first in September 2010 and the second in February 2012. In addition to the chapters in this volume, papers were presented by Whasun Jho, Min Gyo Koo, Ikuo Kume, Jean-Claude Maswana, Thitinan Pongsudhirak, and Lihui Tian. We thank the JICA-RI for the full financial support of the project. Then deputy director Hiroshi Kato, who is now director of JICA-RI and vice president of JICA, and the managerial staff of the institute, provided us with considerable help in logistics. Fiona Shen-Bayh at the University of California, Berkeley, gave valuable help in preparing the final manuscript. We also benefited from useful comments from participants at the conferences. Finally, we want to express our deepest thanks to Peter J. Katzenstein and an anonymous reviewer who read the manuscript and provided helpful comments and critiques, as well as to Roger Haydon at Cornell University Press for his support and encouragement of the project.

Contributors

Muhammad Chatib Basri is minister of finance of the Republic of Indonesia and professor of economics at the University of Indonesia.

Yun-han Chu is distinguished research fellow of the Institute of Political Science at Academia Sinica.

Richard Doner is the Goodrich C. White Professor of Political Science at Emory University.

Barry Naughton is Sokwanlok Chair of Chinese International Affairs at the University of California, San Diego.

Yasunobu Okabe is senior research fellow at the Japan International Cooperation Agency Research Institute.

T. J. Pempel is Jack M. Forcey Professor of Political Science in the Department of Political Science at the University of California, Berkeley.

Thomas B. Pepinsky is associate professor in the Government Department at Cornell University.

Keiichi Tsunekawa is senior professor at the National Graduate Institute for Policy Studies, Tokyo.

Introduction

Crises, Corrections, and Challenges

T. J. Pempel and Keiichi Tsunekawa

To paraphrase Tolstoy, noncrisis financial situations are happily alike but every financial crisis creates unhappiness in its own way. The differences among crises are particularly salient when one compares the economic devastation that swept across Asia in 1997–98 with the havoc wreaked throughout the United States, Western Europe, and much of the rest of the world in 2008–9. Both crises emerged from the intersection of the explosive growth and acceleration of cross-border financial flows and the political manifestations of that gargantuan financial power. Although both meltdowns were similar in their sweeping devastation to numerous national economies, they differed in that each was triggered by distinct economic factors, each exploded across a different trajectory, and the devastation generated by each varied according to the unique vulnerabilities and strengths of individual political economies.

For East Asia, the two crises were transmitted through distinct channels—hot money, currency misalignments, and a liquidity crisis in 1997–98; trade contraction but far less damage to finance and the core economies in 2008–9. The nature of East Asian vulnerabilities in the two crises was thus quite different. As a consequence the impacts of the two crises across East Asia took demonstrably different forms—a regional financial crisis of short duration in 1997–98, but a trade-driven shock followed by a rather smart East Asian snapback from the notionally global disruptions in 2008–9.

The Asian Financial Crisis (AFC) had few negative impacts on Europe and the United States; if anything it provided instead an opportunity for quick profits by many of their investors. By contrast, the Global Financial Crisis (GFC) staggered both the United States and much of Europe, threatening a global financial freeze-up that was avoided only through massive government intervention using taxpayer money. And the GFC ultimately ushered in an extended period of slow growth, extensive unemployment, fiscal imbalances, and in Europe a currency crisis that for several years challenged the very viability of the euro. As of early 2014, that tableau of miseries remained largely unabated.

Focusing on the differences between these two crises runs afoul of the broad conclusion advanced by Reinhart and Rogoff (2009) in their ironically titled book, This Time Is Different. In their book, Reinhart and Rogoff analyze eight centuries of what the authors label financial folly, underscoring what they highlight as a set of disastrously similar economic conditions that recur with astonishingly consistent levels of frequency, duration, and ferocity. Historically, the authors contend, each time such familiar economic storm clouds have gathered, powerful voices of optimism have outshouted the scattered Cassandras, insisting that past rules have changed, a new economic paradigm is operative, and contemporary worries are misplaced since this time is different. Only after the same devastating collapses have ushered in their familiar litany of economic afflictions are the worriers proved right (once again). Reinhard and Rogoff’s economic data are compelling in highlighting the macroeconomic similarities tying together a wide swath of crises and underscoring the relative ease with which collective greed repeatedly spawns mass delusion.

What their analysis ignores, however, and what this book addresses, are the divergent political conditions that gave rise to particular crises as well as the political changes that individual crises may catalyze. Focusing exclusively on the macroeconomic similarities among crises, while valuable, is analogous to studying a sequence of disastrous house fires by analyzing the commonalities in combustible materials, winds, and heat without addressing the divergent implications of one having been started by lightning, another by a smoker in bed, faulty wiring in a third, and an arsonist in the fourth.

The GFC of 2008–9 involved a transatlantic meltdown of capital markets that ravaged the financial infrastructures and subsequently staggered the real economies of the United States and most of Western Europe. In striking contrast, national economies in East Asia, despite being initially jolted by the financial storm due to drop-offs in global trade, weathered the crisis far better. As late as 2014, the U.S. economy continued to wobble under the effects of sluggish macroeconomic growth, higher levels of unemployment and underemployment, substantial government debt, stringent fiscal austerity, and the failure or nationalization of many high-profile and previously profitable private financial institutions. Owing to the interconnectedness of global finance, the availability of cheap credit, and an eventual pan-Atlantic housing bubble, most Western Europe countries encountered similar problems. The bursting of those bubbles unleashed a rippling debt crisis that for several European countries became a sovereign debt crisis. Virtually all countries in the Eurozone, along with the United Kingdom, were thus roiled by a wave of economic problems plus deeper than usual domestic political tensions as debate emerged about which national policy directions could best alleviate the economic pain. Eight of seventeen EU countries saw changes in government. In striking contrast, within two to three years after the GFC struck, most East Asian economies were basking in positive fiscal balances, substantial GDP growth rates, rising global exports, only modest unemployment, generally stable political conditions, and positive projections about the economic future of the region as a whole.

The buoyancy that most of East Asia’s economies demonstrated so soon after the GFC (Japan being a notable exception) stands in striking contrast with the region’s devastation after the AFC of 1997–98. Japan’s economic bubble had burst in early 1990 leading to its (first) lost decade and an ongoing political effort to regain its economic footing. And then as the Asian contagion cascaded across the region, several of East Asia’s hitherto miracle economies found themselves weighed down by collapsing currencies, bank failures, massive nonperforming loans, parabolic escalations in unemployment, and plummeting growth rates. Public confidence in government deteriorated as well, and several countries including Indonesia and Thailand underwent extensive political transformations triggered by the crisis. Second-order political repercussions were felt elsewhere. In China prior reliance on state-owned enterprises gave way to increased private ownership; in Malaysia advocates of neoliberalism were subjected to a vicious political crackdown; and in South Korea the AFC afforded a new president the opportunity to force a sweeping reorganization of the nation’s powerful industrial groups (chaebol ).

Equally significant, the apparent flip-flop from a miracle region to one in dire straits left many political leaders and analysts in the West triumphant in their conviction that the previous decade or more of dizzying East Asian growth had been little more than a castle built on sand, finally dashed because of the region’s collective defiance of what were presumed to be the universal principles of economics underpinning the more structurally sustainable economic muscle of North America and Europe (see Noble and Ravenhill 2000; Pempel 1999a; Sheng 2009, passim but especially chapter 3). What a difference a decade makes.

This book examines these two crises in an effort to address two overarching questions: (1) Why did the countries of East Asia fare so differently in these two crises? and (2) Does East Asia’s successful weathering of the GFC, particularly when viewed in comparison with the listless economic recoveries and apparent lack of political direction within the United States and Europe, suggest that East Asia is poised for a second Asian miracle analogous to that touted by the World Bank in 1993.? If East Asia does perform well economically, even if short of another miracle, how well poised would the region be in the broader context of global economic growth?

The East Asian Miracle

To understand the two crises and their effects on East Asia, it is necessary to start with East Asia’s phenomenal economic growth prior to the 1997–98 crisis. The collective economic growth rates enjoyed across much of East Asia during the 1980s and early 1990s constituted one of the global economy’s more stunning success stories. Japanese growth rates were double those of the OECD countries for nearly thirty years, from the late 1950s until the early 1990s. Japan as the first chapter in the East Asian growth story was quickly followed by exceptional GDP growth rates in Korea, Taiwan, Singapore, and Hong Kong, and later by similarly exhilarating liftoffs in Thailand, Malaysia, and Indonesia, along with those of the notionally communist regimes in China and Vietnam.

No single analysis gave more prominent testimony to this East Asian miracle than the 1993 study by the World Bank. Lauding the successes across what the authors labeled developing East Asia, the World Bank emphasized East Asia’s positively reinforcing cycle of economic development based on high rates of investment and saving, efficient use of resources, moderate inflation, low income inequality, educated workforces, rapid export growth, adoption of new technologies, and political stability, to highlight only the most prominent features.

The report’s conclusions reflected the intellectual tensions between the neoliberal economists from the International Monetary Fund (IMF), who explained that the region’s collective growth rested on fulfillments of the traditional neoclassical economic agenda, and those who emphasized the centrality of governmental policies, institutional strengths, and selective market interventions as integral to East Asia’s success. Not insignificantly, the latter group was roundly applauded by the government of Japan, the key funder of the study.

The finished product was, not surprisingly, unwittingly schizophrenic about the relative balance between the roles played by getting the prices right versus getting the prices wrong. The former concept was advocated by neoliberal economists who operationalized the study, while the latter idea, espoused by theorists of catch-up industrialization, relied on nonmarket compatible policies (see Johnson 1982; Pempel 1978;Woo-Cumings 1999).

The East Asian transformation invariably rested on both, as the analysis in chapter 1 of this book details. It grew out of a positive synergy between government interventionist policies that often defied the prescriptions of neoliberal economics, plus the selective exploitation and embrace of global market forces. Virtually all governments overseeing national economic successes across East Asia rejected the purest neoclassical economic prescriptions in favor of selective protectionist barriers and periodic and targeted government interventions. At the same time, unlike the governments in many other less-developed countries during the same period, those in miracle East Asia sought neither to insulate their domestic industries completely from global forces nor to engage in the levels of micromanagement or the creation of single national champions that could generate high profits for a select few firms at the expense of macroeconomic growth for the country as a whole. Rather, they took advantage of expanding global markets to move their countries from import-substitution to export-led growth, demonstrating that defiance of free market orthodoxy in the short term could be economically beneficial in the long term.

However, as the AFC demonstrated with a vengeance, such developmental strategies were far from invulnerable. Only four years after the World Bank’s publication lauding the miracle, many of the applauded East Asian economies were roiled by the AFC. Furthermore, the economic vigor of the Japanese economy had already come into serious question as it lumbered through stubbornly slow recovery after the bursting of its 1985–90 bubble economy. When the AFC struck, Japan was both economically and politically hobbled in the assistance it could credibly offer to its neighbors. The fragility of East Asia’s miracle became apparent as previously successful national development strategies ran headlong into the overwhelming counterforces of global finance.

Nevertheless, as post-AFC developments showed and as East Asia’s collective performance suggested in the aftermath of the GFC of 2008–9, the countries of the region demonstrated high degrees of underlying strength. Snapback recoveries by the most negatively affected countries after the AFC, and similar recoveries since 2010, suggest that East Asia’s early economic successes were more than a historical fluke. In contrast the economic resilience of the United States and much of Western Europe looked far more problematic.

Collective Perspectives

In addressing the two key questions in this book—Why such different impacts on East Asia from the two crises? Is Asia now poised for long-term economic success, a second miracle perhaps?—the contributors to this volume bring a common perspective. To date, analyses of the two crises have been dominated by economists with their disciplinary predisposition to search for causes in the mixture of exchange rates, currency pegs, financial regulations, international financial architecture, long-term versus short-term borrowing, derivatives contracts, and the like. All of us accept the importance of such factors, but we address the issues surrounding the AFC and GFC from our combination of considerable experience in the study of specific East Asian countries and a common intellectual anchoring in the general approaches of political economy. We are convinced that a richer and more insightful understanding of the causes and reactions to both crises can best be achieved by greater sensitivity to the interplay between politics and economics in specific countries, as well as by the interaction of domestic and international forces more generally.

It is our collective view that neither markets nor states in their most reified incarnations can adequately explain the causes, consequences, and adjustments to these crises; rather, it is their interactions that are critical. Similarly, we are skeptical of any reification of allegedly domestic versus international forces. International relations theories offer insightful and parsimonious explanations for complex phenomena. At the same time, such parsimony too frequently skirts the significance of domestic political conflicts and structures, rendering them peripheral to the key questions we seek to answer about the two crises. Yet exclusively domestic explanations are no more satisfactory in their failure to recognize the interconnected nature of the crises as their impacts spilled quickly over national borders.

As others have noted (see Cumings 1984; Haggard 1986; Pempel 1999b), East Asia’s original economic success occurred in the context of a specific set of international circumstances, marked by global bipolarity in which the United States and the Soviet Union competed for allies among developing countries using economic assistance and favorable market openings as frequent inducements.

Unquestionably the exogenous forces of global finance played a vital role in the AFC. The crisis was triggered largely by short-term hot money moving into and out of the thriving East Asian economies. When IMF packages were requested (however reluctantly) by Indonesia, Thailand, and South Korea, their strict terms reflected external global financial muscle swamping domestic preferences. Yet equally important, although Malaysia faced a roughly comparable economic situation to these other three countries, it rejected an IMF bailout, largely as the result of domestic political factors, in favor of freezing convertibility of the national currency, the ringgit, and prohibiting offshore banks from trading in its domestic currency. Similarly, political efforts by the financial and governmental leaders of Taiwan have long tilted toward economic policies that frequently defy economic logic but prove to be far more prudent than those of many of its neighbors. Such prudence is driven by ongoing political anxieties about the island’s diplomatic isolation and the consequent fears about the vulnerability of Taiwan’s de facto sovereignty should its domestic economy falter even slightly.

In the wake of the AFC, governments often took quite different measures to adjust to the newly felt global pressures. South Korea, for example, was far more welcoming of foreign investment in that country’s banking system than were Taiwan or China. China was quicker and more thorough in attempting to reduce the power of state-owned enterprises (SOEs) than was Vietnam.

Furthermore, as the chapters in this book show, although many national governments confined their post-AFC changes largely to tactical adjustments of their financial policies and institutions, others such as Thailand sought to overhaul the national trade regime, while still others such as China engaged in massive programs of physical infrastructure development. Further, political adjustments were not uncommon. Thus both Indonesia and Thailand were hit by major changes in the very nature of their domestic political regimes, and in Korea the new Kim Dae-jung government that took office at the height of the crisis used the country’s economic dislocations to seek substantial partisan advantage through challenges to the chaebol. China, despite emerging relatively unscathed from the AFC, made substantial changes in preexisting economic strategies and the organization of state-owned enterprises (SOEs) largely out of fear that prior policies would ultimately result in negative domestic political repercussions.

From the same perspective, in the 2008–9 crisis most of the exporting nations of East Asia faced massive slowdowns as global demand for their exports plummeted. Indeed, in October 2008 South Korea was on the verge of another capital flight crisis, which was avoided only because of a quick injection of U.S. capital. But East Asia’s larger economies were able to contribute to the global bailout orchestrated largely by the G-20, taking coordinated political actions to stimulate their national economies through classical Keynesian budgetary measures. And without a doubt the East Asian countries were helped by the fact that the major economies across Europe, North America, and East Asia collectively rejected domestic protectionist measures such as those introduced on a global scale during the global depression of 1929–32. Domestic political action mitigated deteriorating external economic conditions.

As such examples demonstrate, the two crises and reactions to them involve an intersection between politics and economics that cannot be adequately understood by privileging either discipline over the other. Similarly, external or global forces, particularly the force of global capital and new global financial instruments, are undoubtedly at the heart of the two crises, yet these global economic forces are invariably refracted through different domestic structures, which can frequently mitigate their impacts. Thus our analyses seek to take suitable account of both domestic and international factors, as well as political and economic interactions, as they bear on our two central questions.

A second major perspective that underpins our analysis is the importance of sensitivity to East Asia as a region, fuzzy and inexact as the term region may be (see Breslin et al. 2002; Katzenstein 2005; Pempel 2005). Following the end of the Cold War and the demise of superpower bipolarity with its preponderant influence over so much of global politics, interactions among geographically proximate nation-states, including activities in East Asia, have grown in importance as more proximate interactions among neighboring countries demonstrate their growing independence from such macroglobal trends (see Buzan and Weaver 2003; Lake and Morgan 1997; Solingen 1998). Often these regional actions have been cooperative, particularly as they have led to closer economic interactions. In the security arena, in a few regions (though not in East Asia) cooperation has been sufficiently extensive to allow one to speak meaningfully of regional security communities; in both economics and security, however, regional interactions, whether positive or negative, have gained an increased salience in national agendas that was often impossible in the shadow of superpower competition.

Thus, notwithstanding the fact that the AFC eventually resonated beyond East Asia, affecting countries such as Brazil and Russia, the crisis exerted its deepest effects in East Asia and many of these were regional in nature. Indeed as the chapters in this book will show, it was not only countries that were devastated economically that adjusted in its aftermath; other countries in the region, such as China, Vietnam, and Taiwan—countries that largely escaped the worst economic effects, nonetheless adjusted previous policies to enhance their resilience against future vulnerabilities.

Equally important, if 1997–98 showed the contagious links among Asian economies, regional cooperation was forthcoming in its aftermath. The central concern was to enhance regional resilience against any repeat of the region’s demonstrated vulnerability during the crisis. Economically, this was played out through deeper production networks, greater foreign direct investment, monetary cooperation, and formal bilateral and minilateral trade pacts (see Katzenstein and Shiraishi 1997 and 2006; Pempel 1999a). Furthermore, despite many national differences in postcrisis adjustments, governments across the region also followed similar paths to enhance existing intra-Asian investment, trade, and monetary cooperation. Such regionwide actions helped to buffer the region against potential future financial shocks and helped minimize the Asian fallout from the GFC.

Finally, it was East Asia as a region, rather than just a collection of separate countries, that emerged from the crisis economically stronger and with a renewed conviction among its leaders that core elements of their prior developmental strategies had proved largely successful and should remain in place. In analyzing these two crises and the ways in which they played out so differently for East Asia on the one hand and the United States and much of Europe on the other, we believe that the interacting concepts of economic vulnerability and economic resilience are helpful.

Economic vulnerability can be defined as the likelihood that a country’s economic development process is hindered by unforeseen, and usually exogenous, events (Guillaumont 2008 and 2009; Cariolle 2010). But as we will see, economic vulnerability in the abstract can be the result of highly particular weak spots that will differ from country to country. National economies, and indeed the global economy, are like ecosystems; various components are highly interdependent so that breakdown in one component may well endanger the system as a whole. Large segments of any national, or indeed the global, economy can appear perfectly sound even as quite specific portions of that economy reveal themselves under crises to be the chinks in the suit of armor or the one weak link in the interconnected economic chain that creates systemic ruin. In the phrasing of Zolli and Healy, a complex economic system may therefore be both robust but fragile (2012, 25–60).

The concept of resilience is widely applied across a range of studies, including architecture, natural disasters, ecosystems, internal organizational patterns, post-traumatic stress, and antiterrorism policies. In virtually all of these cases the central question is: What causes one system to break and another to rebound? As Zolli and Healy ask, In an age of constant disruption, how do we build in better shock absorbers? (2012, 3). The core of resilience is the ability either to withstand external shock or to return to normal after some traumatic event. Briguglio and his colleagues thus define economic resilience as the ability to absorb, cope with or come back from an external economic shock (2008, 4). They go on to elaborate several macroeconomic conditions that contribute to such resilience, eventually ranking individual countries accordingly. Similarly analysts studying the economic resilience of U.S. metropolitan regions identify key traits that contribute to regional economic resilience (Institute of Governmental Studies 2013): yet the notions of vulnerability and resilience remain more intuitive than theoretically sophisticated.

Despite being underdeveloped in the sphere of political economy, these notions are intuitively helpful in understanding important variations in the performances of different political economies and regions during these two crises. Countries in East Asia demonstrated particular areas of economic vulnerability during the AFC, most notably their vulnerability to rapid inflows of short-term foreign capital. Yet they also showed high levels of resilience in their underlying economic structures by the rapidity of their recoveries. In the GFC, by way of contrast, East Asia was vulnerable to a temporary global trade shutdown but highly resilient to the underlying financial vulnerabilities evident in the United States and so many European countries. And the importance of financial linkages and capital markets within the national economies of the United States and Europe has continued to underscore the vulnerability of their entire economic systems to financial collapse and their lack of more comprehensive national and regional economic resilience in bouncing back.

Five Focal Points

The book addresses two central questions: Why East Asian performances were different during the two financial crises and to what extent East Asia is now poised for sustained economic success? In dealing with these overarching questions, the authors analyze what we feel are five key factors critical to answering them. A starting point is the belief that both the AFC and the GFC took place as the result of a damaging collision between national developmental strategies and the forces of global finance. To address this intersection, we begin by highlighting the essential common elements within the discrete patterns of East Asia’s economic growth prior to the onset of the AFC in 1997. How were so many countries in the region able to achieve such substantial jumps in their GDP and per capita incomes for so many years, in the process of catching up with and passing so many other parts of the world? Equally important from a political perspective, how did they achieve such dynamic economies while maintaining relative political stability at home? We make the argument generally, and individual chapters bolster this contention in greater detail for specific countries from Japan to Taiwan to Indonesia, that two factors were particular vital: high levels of capital investment given over to enhanced production on the one hand and close government-business relations on the other. These two features combined to allow individual countries to catch up quickly to more economically and technologically sophisticated countries, to close many of the gaps between where they began economically and where they hoped eventually to be and in the process to incorporate an impressive variety of politically critical socioeconomic sectors.

Equally important, however, is a second concern, namely the AFC itself. Certain inherent components integral to East Asian growth prior to the AFC, particularly the high levels of investment and the close ties between business and government just noted, left these same countries vulnerable to what proved to be the pulverizing consequences of fast-moving global capital in 1997–98. Continued high investment and political stability made many of the countries of East Asia particularly tempting targets for large-scale, but often short-term, investment by Western hedge funds, brokerages, and other investors. Neither the governments nor the financial institutions in these East Asian countries were adequately prepared to check the rapid movement of such highly mobile capital, first rushing in, but then equally quickly rushing for the exits as conditions soured.

In short, the pattern of East Asian growth and stability, positive as it was for a time, simultaneously left many countries in the region highly vulnerable to the particular nature of the crisis that ensued. In this sense, the AFC was the consequence of factors well beyond simple failures linked to crony capitalism or moral hazard, two of the most frequently cited reasons for the crisis (see Bosworth 1998; Radelet and Sachs 1998). Such features, to the extent they did exist in certain countries, did not emerge overnight in 1997 and hence provide little independent insight concerning the onset of the regional meltdown. More fundamentally, we argue, it was the interactions between the peculiarities of the domestic political economies of the most severely affected countries and the power of fast-moving global capital wielding highly sophistical financial instruments that provided the combination of tinder and flame that was central to the eventual financial wildfire that ensued.

A third analytic thread critical to understanding the different experiences of East Asia during the two crises centers on the prophylactic actions taken by numerous countries in East Asia aimed at enhancing their economic resilience against any future recurrence of the 1997–98 debacle. At both the national and regional levels, as will be detailed throughout the book, governments took political and economic steps to strengthen resilience against any future financial shocks.

Suffice to say at this point that although the region fared poorly in the AFC, most of the countries used the crisis to institutionalize valuable policy lessons about their vulnerabilities to global capital forces, and most responded with a series of internal adjustments designed to retain the key elements of successful developmentalism that had been put in place and that had initially been so beneficial to their national economic growth and political stability while also making important adjustments at the margins, the result of which was a much higher regional resilience when the GFC struck.

Virtually all countries in the region, for example, moved to enhance their financial regulatory mechanisms and to ensure greater financial prudence; most bolstered their foreign reserve holdings—often to levels that economists argued was economically unnecessary. In addition, governments in the region deepened their monetary cooperation through formal currency swap arrangements that are currently embodied in the Chiang Mai Initiative Multilateralization (CMIM) among other things. Furthermore intraregional trade was boosted with enhanced regional production networks in addition to multiple bilateral and minilateral free trade agreements (see chapters by Basri, Pepinksy, and Okabe in this book; Aggarwal and Koo 2008; Grimes 2006; Pempel 2005, 2006, and 2008). Important for understanding East Asia’s better performance in the wake of the GFC is that few of the measures taken followed the dictates of neoliberal economics or moved to install the opportunistic banking systems that prevailed in the United States and United Kingdom. Instead,